Question: A restaurant operator wishes to choose between two alternative roll-in storage units. Machine A will cost $9,000 and have a residual value at the end of its 5-year life of $1,500. Machine B will cost $8,500 and at the end of its 5-year life will have a residual value of $700. Assume straight-line depreciation. Investment in the machine will mean that a part-time kitchen worker will not be required and there will be an annual wage savings of $9,600. The following will be the operating costs, excluding depreciation, for each machine, for each of the 5 years.
Assume a 30% income tax rate. For each machine, calculate the NPV by using a 12% rate. Ignoring any other considerations, which machine would be the preferable investment?